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Priced Out of Reach:
How High Taxes Make It Tough to Recruit in MassachusettsMassachusetts had the third highest level of personal income per capita in the United States – 24% higher than the national average – in 1998. [1] The Massachusetts economy, like the national economy, continues to expand at an unprecedented rate. At 2.5%, the state's unemployment rate is at an all-time low. Since the last recession bottomed out in 1991, Massachusetts has added 506,000 jobs, with 67,900 of these added since May 1999. [2]
One explanation for this economic strength lies in the ability of the state to meet the demands of the new economy. Ten years ago, Massachusetts was in the depths of a severe recession. Since then, it has shifted farther and farther from its historic manufacturing base to become a knowledge-based, technology-driven economy that capitalizes on its world-class education and research centers. It has done this by taking advantage of a highly-educated and skilled workforce.
The state has thus shown itself to be resilient and adaptable to the demands of the new economy. At the same time, it has put itself in competition with other parts of the country that are endowed with their own educational resources (and, perhaps, a more agreeable climate as well). A company trying to recruit a software engineer to work in Boston has to compete with the allure of North Carolina's Research Triangle and California's Silicon Valley as well as many other parts of the country with jobs to offer.
Thus, while the state economy continues to create new jobs, certain jobs are going unfilled. In 1999, job vacancy rates were 8.6% for skilled production workers, 8.4% for managers, 7.6% for technicians, 5.4% for scientists and engineers, and 4.8% for other employees. [3] About 6.2% or 24,000 jobs at high-tech intensive companies went unfilled.
The Massachusetts Division of Employment and Training predicts that by 2006 Massachusetts will need workers to fill 400,000 new jobs and, in addition, need workers to fill some 740,000 existing jobs that become open as a result of retirement, promotion and career changes. The state is thus threatened by labor shortages in the very occupations that are most critical to economic growth, even as it faces the need to recruit hundreds of thousands of new workers. [4]
The High Cost of Living in the Bay State
It is important, in this light, to consider factors that make it difficult to recruit the needed workers. Among these, the high cost of living in Massachusetts looms as an important consideration.
There is evidence that Massachusetts is pricing itself out of reach for many workers. The Massachusetts Association of Realtors reports that the cost of an average single-family home in Massachusetts rose 20.7%, from $227,000 to $274,000, between May 1999 and May 2000. For the same period, the Housing Affordability Index for first-time homebuyers in the Northeast region – based on existing single family home sales – declined by 9.8%.
Table 1
Tax Burden per Taxpayer, 50 Largest U.S. Cities
City Total tax burden ($)
Rank City Total tax burden ($)
Rank New York City, NY 21,900 1 Virginia Beach, VA 5,780 26 Boston, MA 11,967 2 Houston, TX 5,664 27 Washington, DC 11,525 3 Kansas City, MO 5,509 28 Philadelphia, PA 11,493 4 St. Louis, MO 5,438 29 Detroit, MI 10,632 5 Long Beach, CA 5,416 30 Chicago, IL 10,105 6 Sacramento, CA 5,228 31 Baltimore, MD 9,575 7 Tulsa, OK 5,194 32 San Francisco, CA 9,401 8 Oklahoma City, OK 5,141 33 Milwaukee, WI 8,909 9 New Orleans, LA 5,093 34 Portland, OR 8,720 10 Dallas, TX 5,004 35 Pittsburgh, PA 8,719 11 Tucson, AZ 4,973 36 Atlanta, GA 8,555 12 Albuquerque, NM 4,823 37 Cleveland, OH 8,457 13 Miami, FL 4,774 38 Columbus, OH 8,128 14 Fresno, CA 4,610 39 Omaha, NE 7,715 15 San Antonio, TX 4,606 40 Honolulu, HI 7,294 16 Ft. Worth, TX 4,584 41 Minneapolis, MN 7,195 17 El Paso, TX 4,554 42 San Jose, CA 6,956 18 Phoenix, AZ 4,501 43 Oakland, CA 6,736 19 Colorado Springs, CO 4,395 44 San Diego, CA 6,468 20 Mesa, AZ 4,112 45 Charlotte, NC 6,368 21 Memphis, TN 4,036 46 Los Angeles, CA 6,296 22 Seattle, WA 3,959 47 Denver, CO 6,192 23 Nashville, TN 3,958 48 Indianapolis, IN 6,018 24 Jacksonville, FL 3,484 49 Austin, TX 5,844 25 Las Vegas, NV 2,687 50 Taxes also figure into a worker's choice of a place to live. While tax revenues go in part to fund schools, museums, sports facilities and other amenities of importance in choosing a place to live, they also raise the cost of living. The greater the state and local taxes that a worker and his or her family must pay in order to work in Massachusetts, the more difficult it is to recruit that worker.
What It Costs to Live in Massachusetts
In order to assess Massachusetts' ability to compete for workers, BHI calculated the combined state and local tax burden that a worker's family would incur by choosing to work and live in each of the 50 largest U.S. cities. [5] We performed our calculations for a family with two adults, filing jointly, who have two children, an annual earned income of $75,000, a 2,000 square foot house and a 30-year mortgage.
Table 1 shows that a family fitting this description incurs $11,967 in state and local taxes – the second highest total tax burden in the country – by choosing to live in Boston. [6] The average for the other 49 cities is $6,668, just a little more than half that for Boston. Put differently, a typical middle class family almost doubles its state and local tax burden by choosing Boston over any other U.S. city.
Table 2 takes the analysis further by broadening it to include the overall cost of living. Consider a Massachusetts software manufacturer that wants to recruit the same family from an out-of-state location such as Charlotte, North Carolina. The table shows us what the employer would have to pay in addition to the $75,000 in income already received by that family, just to make up for the higher cost of living in Boston. As shown, the employer would have to pay an additional $39,260 – 52.3% more than the family earns in Charlotte – or $114,260 just to permit the family to maintain the same standard of living here as it enjoys in Charlotte. Of this premium, $5,599 (the difference between Boston's tax bill of $11,967 and Charlotte's of $6,368) is owed to the higher tax bill that the family would face in moving to Boston.
Of the 50 cities, Boston has the third highest cost of living. On average, a Boston employer has to offer a salary of $106,590 in order to offer a standard of living comparable to what a worker could obtain making $75,000 elsewhere. That means offering a $31,590 premium or 42% over and above the worker's current salary.
Herein lies the significance of state tax policy. Massachusetts employers have to pay a hefty premium in order to recruit workers from out of state. Of this premium, a substantial part, $5,299 (the difference between the Boston tax bill of $11,967 and the average out-of-state tax bill of $6,668) or about 17% is the result of higher state and local taxes. Massachusetts thus runs the risk of pricing itself out of the market for skilled labor – and hence for labor of the kind that it needs to sustain its economic growth – because of high taxes. A policy of keeping state taxes as low as possible is important to the state's ability to attract skilled workers and to fill high-technology jobs.
Some policy makers and opinion leaders – in their willingness to expand government budgets and in their sensitivity to class differences – would ignore this reality. They would lump our representative Charlotte family with the “rich” who, they say, would benefit most from a tax reduction.
That family is not, however, interested in someone else's idea of tax equity. Neither is the Massachusetts employer who has to pay substantially more than his or her out-of-state competitors in order to recruit workers. If a reduction in taxes makes it possible to fill a job in Massachusetts that might otherwise migrate to some other lower-cost-of-living state, then that is good for everyone in Massachusetts, rich and poor alike. This provides perhaps the most compelling argument in favor of the current proposal to reduce the state income tax to 5%.
Table 2
Premium Required to Recruit a Worker to Boston
City Change in Salary Required on Move to Boston($) Salary Change (%) Rank by Highest Cost of Living City Change in Salary Required on Move to Boston ($)
Salary Change (%) Rank by Highest Cost of Living New York City, NY* -$52,166 -69.6 1 Fresno, CA 37,901 50.5 26 San Francisco, CA* -6,897 -9.2 2 Indianapolis, IN 37,922 50.6 27 Boston, MA 0 0.0 3 Houston, TX 38,797 51.7 28 Honolulu, HI 2,825 3.8 4 Phoenix, AZ 38,944 51.9 29 Washington, DC 7,706 10.3 5 Albuquerque, NM 39,031 52.0 30 Chicago, IL 13,785 18.4 6 Milwaukee, WI 39,091 52.1 31 San Jose, CA 14,197 18.9 7 Charlotte, NC 39,260 52.3 32 Los Angeles, CA 19,014 25.4 8 Kansas City, MO 39,617 52.8 33 San Diego, CA 19,111 25.5 9 Omaha, NE 40,195 53.6 34 Oakland, CA 19,247 25.7 10 Dallas, TX 40,204 53.6 35 Philadelphia, PA 22,434 29.9 11 Las Vegas, NV 40,248 53.7 36 Denver, CO 25,232 33.6 12 Virginia Beach, VA 40,403 53.9 37 Portland, OR 27,840 37.1 13 Memphis, TN 40,804 54.4 38 Atlanta, GA 28,030 37.4 14 New Orleans, LA 41,194 54.9 39 Sacramento, CA 28,171 37.6 15 El Paso, TX 42,264 56.4 40 Long Beach, CA 28,376 37.8 16 Tucson, AZ 42,608 56.8 41 Seattle, WA 29,888 39.9 17 St. Louis, MO 43,193 57.6 42 Pittsburgh, PA 30,361 40.5 18 Ft. Worth, TX 43,919 58.6 43 Detroit, MI 32,581 43.4 19 Mesa, AZ 43,948 58.6 44 Baltimore, MD 32,646 43.5 20 San Antonio, TX 43,998 58.7 45 Austin, TX 35,426 47.2 21 Nashville, TN 44,173 58.9 46 Cleveland, OH 35,634 47.5 22 Oklahoma City, OK 46,031 61.4 47 Columbus, OH 35,774 47.7 23 Colorado Springs, CO 46,319 61.8 48 Minneapolis, MN 37,388 49.9 24 Jacksonville, FL 46,650 62.2 49 Miami, FL 37,637 50.2 25 Tulsa, OK 46,968 62.6 50 *For New York and San Francisco, which have a higher cost of living than Boston, the premium is negative. These numbers should be interpreted to mean that, if a Boston worker's family earns $75,000, if would cost an employer an additional $52,166 to lure that worker to New York or and additional $6,897 to lure him to San Francisco.
Footnotes
[1] Commonwealth of Massachusetts, Department of Economic Development, http://www.state.ma.us/econ/keuindic.htm.
[2] Federal Reserve Bank of Boston, Economic Indicators, August 2000.
[3] Massachusetts Technology Collaborative: Index of the Massachusetts Innovation Economy 1999, p. 24.
[4] Commonwealth of Massachusetts, Division of Employment and Training, Massachusetts Job Outlook through 2006.
[5] In order to provide comparable results, we provide calculations for cities. Calculations for metropolitan areas or states would lack comparability because of wide variations in real estate values and property taxes. Differences between cities in taxes and in living costs nevertheless provide a good measure of the corresponding differences between states.
[6] James Angelini, Suffolk University Chair and Associate Professor of Accounting, developed the ReloSmart software (see http://www.monstermoving.com), which we used to perform the calculations for Tables 1 and 2. Professor Angelini is a Research Associate of the Beacon Hill Institute.
posted on October 11, 2000
revised on 09-Feb-2007 5:32 PM
Comments:fconte@beaconhill.org.
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